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Flashback on ECJ Cases – C-204/13 (Malburg) – VAT due on transfer of clientele is not deductible

On March 3, 2014, the ECJ issued its decision in the case C-204/13 (Malburg). The ECJ has ruled that Malburg is not entitled to deduct input tax paid on the acquisition of the clientele. The CJEU considers it important, among other things, that the clientele is not contributed to the assets of the newly established company.

Context: Taxation — Value added tax — Origin and scope of the right of deduction — Dissolution of a partnership by a partner — Acquisition of a portion of the client base of that partnership — Contribution in kind to another partnership — Payment of input tax — Whether deduction possible


Article in the EU VAT Directive

Article 4(1), 4(2) and 17(2)(a) of the Sixth VAT Directive (Articles 9(1) and 168 EU VAT Directive 2006/112/EC).

Article 9 (Taxable person)
1. ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as ‘economic activity’. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.

Article 168 (Right to deduct VAT)
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;


Facts

  • Up to 31 December 1994, Mr Malburg held a 60% share in the German partnership Malburg & Partner (‘the old partnership’), while the other two partners each held 20% shares. The old partnership was dissolved on 31 December 1994, with a portion of the client base being transferred to each of the partners. With effect from 1 January 1995, the two other partners each operated separately as independent tax advisors.
  • On 31 December 1994 Mr Malburg founded a new partnership in which he held a 95% share (‘the new partnership’). According to the findings of fact made by the court of first instance, which bind the referring court, Mr Malburg made available the client base, which he had acquired following the dissolution of the old partnership, free of charge to the new partnership for use in its business.
  • By judgment of 24 September 2003, the court of first instance found that the old partnership had been dissolved on 31 December 1994 by division of its assets. The Finanzamt then assessed the old company as liable for payment of VAT for 1994 based on the transfer of the client base. The VAT assessment for 1994 acquired binding force and the tax due was paid.
  • The old partnership, represented by Mr Malburg, issued an invoice dated 16 August 2004 and addressed to him in the amount of EUR 1 548 968.53 for the ‘division of assets on 31 December 1994’ including a separate itemisation for VAT.
  • In his VAT return for August 2004, Mr Malburg deducted VAT of EUR 232 345.28 which had been invoiced to him in respect of the acquisition of the client base. The Finanzamt refused that VAT deduction.
  • Mr Malburg lodged a complaint against that decision of the Finanzamt and submitted an annual VAT return for 2004 in which, in addition to the input VAT paid for the acquisition of the client base at issue, he declared turnover of EUR 44 990 resulting from his activities as managing director of the new partnership. The Finanzamt rejected that complaint on the ground that Mr Malburg had not used the client base at issue in his own business. According to the Finanzamt, the economic asset which that client base constitutes had been used by the new partnership, an undertaking to be distinguished from Mr Malburg. Mr Malburg was therefore not entitled to any right to deduct input VAT.
  • Mr Malburg brought the case before the Finanzgericht des Saarlandes, which upheld his action.
  • In support of its appeal on a point of law, the Finanzamt claims that the decision of the Finanzgericht des Saarlandes is unlawful and that the principles established by the Court in Case C‑280/10 Polski Trawertyn [2012] ECR do not apply to a situation such as that at issue in the main proceedings since it concerns the deduction of input VAT paid by a founding partner and not the deduction of input VAT paid by a partnership.
  • The Eleventh Chamber of the Bundesfinanzhof, before whom the case was heard, indicates that it is inclined to support the argument that Mr Malburg is entitled to deduct input VAT paid on the acquisition of the client base.
  • First, in accordance with the provisions of the Sixth Directive, as interpreted by the Court, a trader may deduct input VAT, in so far as he purchases services for his business or in so far as they are used or will be used for the purposes of his taxed transactions (see, inter alia, Case C‑137/02 Faxworld [2004] ECR I‑5547, paragraph 24; Case C‑63/04 Centralan Property [2005] ECR I‑11087, paragraph 52; Case C‑257/11 Gran Via Moineşti [2012] ECR, paragraph 23; and Case C‑285/11 Bonik [2012] ECR, paragraph 29).
  • In that regard, the referring court states that it is apparent from the Court’s case-law that preparatory acts must be treated as constituting economic activity (see, inter alia, Polski Trawertyn, paragraph 28, and Gran Via Moineşti, paragraph 26 and the case-law cited), and that the principle that VAT should be neutral requires that the first investment expenditure incurred for the purposes of and with the view to commencing a business be regarded as an economic activity.
  • In the present case, the referring court, without analysing whether Mr Malburg can be categorised as a trader on the basis of his position as managing director of the new partnership, an activity which, according to his VAT return, he carried out in the year in dispute, 2004, considers that, by his acquisition of the client base which he subsequently transferred free of charge to the new partnership for it to use in its business, Mr Malburg carried out an economic activity on behalf of the new partnership by carrying out preparatory acts.
  • Next, according to the referring court, the client base was also transferred to Mr Malburg in his capacity as a recipient of services. This follows from the fact that he acquired the client base in his own name and on his own behalf by way of a division of assets and only subsequently made it available free of charge to the new partnership for use by it.
  • The referring court states finally that, in the present case, the condition set out in the first sentence, point 1, of Paragraph 15(1) of the UStG is satisfied since VAT was due under that law on the input transaction. The Finanzamt decided that the old partnership was subject to VAT for 1994 in respect of the transfer of the client base to Mr Malburg and that tax was paid.
  • That argument cannot, in the opinion of the referring court, be called into question by the fact that Mr Malburg, as a partner in the new partnership, made the acquired client base available to the new partnership free of charge for its use and, to that extent, there was therefore no taxable output transaction and that the direct link necessary between an input transaction and taxable output transaction was, in principle, absent. In Polski Trawertyn the Court held, according to the referring court, that the provisions governing the common system of VAT must be interpreted as precluding national legislation which permits neither partners nor their partnership to exercise the right to deduct input VAT paid on investment costs incurred by those partners, before the creation and registration of that partnership, for the purposes of and with a view to commencement of its economic activity. That judgment is applicable, by analogy, to the present case.
  • However, the referring court observes that the Fifth Chamber of the Bundesfinanzhof disagrees with that interpretation and considers that the reasoning of the Court in Polski Trawertyn cannot be applied to the present case. Thus, in particular, in its view, the transaction in dispute does not constitute ‘an investment transaction’ such as that at issue in the case which gave rise to the judgment in Polski Trawertyn. According to that Chamber, the present case involves not the acquisition of capital goods by the new partnership but merely the provision of such goods for use by that partnership. In addition it points out that the ‘output transaction’ carried out by Mr Malburg involves not a taxable transaction, as was the case in Polski Trawertyn, but rather a transaction which is in itself non-taxable.
  • In that regard, the referring court considers that doubts remain as regards the exact interpretation of the provisions of the Sixth Directive.

Questions

Having regard to the principle of tax neutrality, must Article 4(1) and (2) and Article 17(2)(a) of [the Sixth Directive] be interpreted as meaning that a partner in a partnership of tax advisors who acquires from the partnership a portion of its client base for the sole purpose of transferring it directly thereafter and free of charge to a newly founded partnership of tax advisors, in which he is the principal partner, for it to use such client base in its business, may be entitled to deduct the input tax paid on the acquisition of the client base?


AG Opinion

None


Decision

Article 4(1) and (2) and Article 17(2)(a) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995 must, having regard to the principle of value added tax neutrality, be interpreted as meaning that a partner in a partnership of tax advisors who acquires from that partnership a portion of its client base for the sole purpose of making that client base available directly and free of charge to a newly founded partnership of tax advisors, in which he is the principal partner, so that that partnership can use that client base in its business, without that client base however becoming part of the capital assets of the newly founded partnership, is not entitled to deduct input value added tax paid on the acquisition of the client base concerned.


Personal comments/VATupdate 

Dissolution of a company by a partner – Acquisition of part of the clientele of this company – Contribution in kind to another company

A partner of a civil-law company of tax consultants, who acquires a part of the clientele from this company for the sole purpose of immediately making the clientele available to a newly formed civil-law company of tax consultants, in which this partner is a majority shareholder, without However, the fact that those clients are included in the assets of the newly created company cannot claim deduction of the input tax paid on the acquisition of the clients concerned.


Source:


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